Reform

Last Wednesday, a bill was introduced in the House that could possibly end patent trolling as we know it. Judiciary Comittee Chairman Bob Goodlatte (R-Va.) introduced the “Innovation Act of 2013,” which would significantly amend the patent enforcement process with the goals of curbing patent trolling generally, and specifically to prevent nuisance suits against end-users of patented products. Briefly put, the new bill would:

  • Enhance Pleading Requrements – Plaintiffs will be required to specify in their complaint what claims are alleged to infringe, and what “instrumentalities” of the accused device infringe them.
  • Provide Mandatory Fee-Shifting – Courts must award attorneys fees to the prevailing party unless the non-prevailing party’s position was “reasonably justified” or an award would be unjust.
  • Allow Joinder of “Interested Parties” – If the plaintiff is a patent assertion entity (PAE) with no interest in the patent other than litigation, the defendant can petition the court to join an “interested party.” This could be the patent’s assignee, an exclusive licensee, or any party with a contractual right to a share of the litigation’s recovery.
  • Limit Pre-Markman discoveryIf the outcome of the case depends on the construction of the patent (which occurs in essentially all cases), discovery will be limited to documents necessary to construe the patent until the court issues a claim construction order.
  • Require Disclosure of Ownership – When a complaint is filed, the plaintiff must disclose to the USPTO the (1) owner of the patent, (2) any exclusive licensees, (3) any party with a “financial interest” including a right to a share of litigation recoveries, and (4) the ultimate parent company of any of the above.
  • Allow Stays of Litigation Against End-Users – To prevent trolls from harassing end-users of patented products, a customer can request a stay of the litigation while another action involving the manufacturer, including a Declaratory Judgment Action, proceeds.

This proposed legislation has drawn broad-based support from technology businesses and public interest groups like the  Electronic Frontier Foundation. The Director of the USPTO’s Office of Governmental Affairs has also indicated that the USPTO expects the Innovation Act to pass in some form this year. The question remains as to how effectively the legislation will serve its purpose, or whether PAE’s will simply innovate around it.

Some of the amendments directly fix existing problems. For instance, the enhanced pleading requirements will specifically address the extremely lax pleading standards currently in place for patent suits. While Twombly and Iqbal usually determine the requirements for pleading, they do not apply where there is a form complaint in the Federal Rules of Civil Procedure. Form 18, the model complaint for patent infringement, is strikingly sparse, and likely would not be sufficient under the Twombly standard. Perhaps the easier solution would be for the Rules Committee to abolish the forms, but the Innovation Act would accomplish the same thing.

Other provisions are deeply controversial. For instance, the fee-shifting provisions is nearly an express repeal of the American Rule for patent litigation. It can only be prevented by the non-prevailing party proving that its position was “substantially justified” (a term anxiously awaiting judicial interpretation), or that fee-shifting would be “unjust.” The chief concern with the provision is that it may prevent the filing of meritorious suits by small and midsize companies that may not be able to absorb a massive fee award if they lose. The target of the provision, the PAE’s, may instead be able to avoid this, and even now are typically organized to be judgment-proof.  Fee awards would be useless against PAE’s that own no assets other than the asserted patent.

One place where the Innovation Act does innovate is its “interested party” provisions. It allows courts to pierce corporate veils by holding parent companies and companies with a “financial interest” jointly and severally liable for fee awards and even provides for mandatory joinder of interested parties. Further, even where financially interested parties are not joined, the Act would require a plaintiff to disclose all parties with a “financial interest” at the outset of litigation. This provision is aimed at a widespread practice of companies selling patents to PAE’s for the purpose of filing lawsuits. These PAE’s are little more than shell companies that hold the patent and assert it in litigation. They serve to limit the possible liability of the original owner for attorneys fees awards, and insulate them from the PR effects of being known as a PAE. By forcing disclosure, the act deprives them of the PR benefit of using a shell company, and by holding interested parties jointly and severally liable, it serves to discourage the intentional creation of judgement-proof PAE’s.

If the act passes with any combination of these provisions, it will be fascinating to see how PAE’s and courts respond. The act seems well-suited to its task, but PAE’s may innovate themselves. Even if it does not eliminate trolling activity, it may go a long way to preventing abusive patent litigation tactics.

–Parker Hancock

Image Source 1 (REFORM image)

Image Source 2 (Rep. Bob Goodlatte)

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